Pension Schemes Bill

I inform the House that Lords amendments 68 to 76, 78, 80, 84 and 86 engage the Commons’ financial privilege. If any of these Lords amendments are agreed to, I will cause the customary entry waiving the Commons’ financial privilege to be entered in the Journal.

Clause 2

Asset management

I beg to move, That this House disagrees with Lords amendment 1.

With this it will be convenient to discuss:

Lords amendments 5, 6, 13, 15 to 24, 26, 27, 30 to 43, 77 to 79, 83, 85 to 88, and Government motions to disagree.

Government amendments (a) to (c) to the words restored to the Bill by the Commons disagreement to Lords amendments 15 to 24, 27, 30 to 34, 36, 38 to 42, 83 and 88.

Lords amendments 2 to 4, 7 to 12, 14, 25, 28, 29, 44 to 76, 80 to 82, 84 and 89.

Let me start by thanking Members of both Houses for their careful scrutiny of the Bill before us today. I thank Members of the other place for their amendments, which we are considering today; in particular, I thank Baroness Sherlock and Lord Katz for their steering of the Bill in recent months.

This is a complex Bill, but it is one with a simple goal: higher returns for pension savers. As I noted on Second Reading, this is a particular responsibility of this House, because it is legislative action, in the form of auto-enrolment, that has got Britain back into the habit of workplace pension savings. We must ensure that those savings deliver, overcoming the challenges of a system that is too fragmented and where there is insufficient focus on how hard people’s savings work to support them in retirement.

A complex Bill means something else: amendments. As is normal, the Government brought forward changes in the other place that we today ask this House to endorse. The vast majority of them are technical, ensuring that the legislation works as intended. Of the more substantive changes, I will highlight three.

First, the Government tabled amendments in the other place that will help to ensure that superfunds will not be forced to wind up when they still provide a high level of security to their members. Secondly, on the Atomic Weapons Establishment pension scheme, we are reflecting the reality that since 2021, AWE has been wholly owned by the Ministry of Defence. Its closely defined benefit pension scheme is backed by a Crown guarantee. These Government amendments therefore move it on to the same basis as other central Government pension schemes; the accrued rights of members are of course fully protected. Finally, on the value for money measures, the Government amendments provide for provisions to be commenced via regulations, to allow decisions about the introduction of elements of the VFM framework to reflect detailed design work and consultation.

I declare an interest as a pensioner. The pensioners who come to me are a wee tad unsure about what is on offer for them. They are perhaps confused, because they get advice from people here to move in one direction, and then somebody else will give them advice to move in another direction. What can the Minister and the Government do to provide the correct support and advice to people who are hesitant or unsure about what to do with their pension pots at a time when it is really important? We have seen many scams, and we hear about much happening in relation to this issue. I want to ensure that pensioners in particular have the opportunity to get the advice that they need very much.

As always, the hon. Member asks an excellent question. For people who are currently still working, it is important to keep the simple advice at the front of their mind that people should be saving towards their pension. In almost all circumstances, saving is the right thing to do, and we have strong tax incentives in the system to encourage people to do that. We should ensure that that message is heard loud and clear, and I am sure that he makes that clear to his constituents.

On the harder question of how those approaching retirement decide to use their pot, it is often right to take advice, and obviously the Money and Pensions Service exists to provide that. Others choose to take it from other sources, not least from their providers themselves. The hon. Gentleman is right; we are leaving too much pressure on individuals to manage those decisions alone. That is why the default pensions parts of the Bill, which I think have cross-party support, are important in simplifying that journey for people. People can do what they want, but they will not end up with a bad outcome just because they are faced with a confusing situation in front of them. The onus will be on trustees and providers of pensions to navigate that for those individuals.

Let me come back to small pots. I will make one specific point, which was raised in the other place, regarding worries about those who are taking career breaks, particularly for maternity leave, and have a dormant pot for a period of time. I want to reassure the House that paid maternity leave obviously sees contributions into pension pots continue, rather than those pots becoming dormant, and there is the most important wider safeguard, which is the ability for anyone to opt out of their pot being consolidated. That safeguard covers exactly this kind of eventuality, even though it would be only a very small number of cases.

I now turn to the Bill’s reserve power on asset allocation, a power that has one purpose, which is to support better outcomes for savers, and one use case, which is to underpin the industry’s collective view that delivering those better outcomes for savers over time is supported by a more diverse asset allocation. [Interruption.] Let me spell this out a bit more, as I am being encouraged to do by the hon. Member for North Bedfordshire (Richard Fuller). There is strong evidence, not least internationally, that pension savers’ interests lie in greater investment diversification than we currently see in the UK defined contribution market. That is why 17 of the UK’s largest providers designed and signed the Mansion House accord, committing to invest at least 10% of their default funds in private markets by 2030. Those schemes are not just talking; they are acting, building up the capacity to invest in a wider range of assets.

However, while the industry is making progress, it has also spelled out a well-recognised collective action problem: an industry dynamic that sees competitive pressure to win and retain employers driving a narrow focus on keeping headline costs as low as possible, not on what matters to employees—the net returns on their savings—which is what we all want schemes to focus on. This risks a pension provider that is building the diverse investment capability to deliver returns for savers being undercut by a competitor making a virtue of not doing so, even though it knows that that is not in the best interests of savers. The industry itself raises this issue; it is not an abstract risk, because it has already happened.

Under the previous Government, the Mansion House compact saw a narrower agreement on the importance of private markets signed. It was signed, but it was not delivered. Given that we all agree that it would have been good, why was it not delivered? The industry has now published its own progress update spelling out why. The single biggest barrier to delivering on its commitment was, in its words, that

“market dynamics continue to focus on minimising cost instead of maximising long-term value”,

and without intervention to shift that culture,

“‘too much focus on cost’ remains the key barrier.”

That is the collective action problem in a nutshell, and solving it—giving the industry certainty that it can do what is in savers’ interests, because the rest of the market will move too—is the only purpose of the reserve power. That is why we cannot support the Lords amendments that seek to remove it. To do so would be to let savers down, to ignore the strong consensus about what is in savers’ interests and to disregard the barriers that we all know are holding back delivery on that consensus—a view spelled out by the previous Conservative Chancellor, the right hon. Member for Godalming and Ash (Sir Jeremy Hunt).

I have been clear that that is the only reason the reserve power exists. To reinforce that point, our amendments in lieu today spell out that the power can be used only to support the industry’s view of what is in savers’ interests, as laid out in the Mansion House accord. The majority of savers’ contributions are held by schemes that have signed up to that accord.

Then why worry?

I have just explained to the hon. Member why he should be worried. He is happy to carry on with the status quo; we are not.

We are going to set this out in two ways. First, we will specify on the face of the Bill that regulations under the reserve power cannot require more than 10% of assets to be held in qualifying assets overall or more than 5% in the UK—exactly matching the Mansion House commitments. Secondly, our amendments require any regulations to implement the reserve power to be entirely neutral between asset classes, spelling out that a future Government who took a different view from this one could not use the power to direct investments into hand-picked asset classes.

The existing safeguards in the Bill also remain: the time limit, the reporting requirements, the affirmative procedure, and—most importantly—the savers’ interest test that allows pension schemes not to deliver against the reserve power requirements where it is not in savers’ interests to do so.